This journal is written by Simon Ward, Henderson's chief economist. Simon comments on economic and market developments from a monetary perspective. We hope you find the content interesting and welcome comments or questions.

Recent Chinese news has been downbeat, suggesting that the authorities need to accelerate policy easing to keep a “hard landing” at bay.

Chinese economic prospects seemed to improve in late 2011 as real money expansion revived in response to policy easing and a slowdown in inflation. January monetary numbers, however, were disappointing, with the six-month rise in real M2 falling back and real M1 showing a rare contraction – see first chart. The earlier-than-usual New Year holiday had a depressing effect but is unlikely to be the whole story, judging from a comparison with previous years when the timing was similar.

Downside risk is also suggested by a forecasting indicator derived from the OECD’s Chinese leading index – a composite of seven forward-looking economic and financial variables. The December reading of the indicator was the weakest since October 2008, signalling a further slowdown in industrial output in early 2012, a prospect that may be reflected in renewed weakness in business surveys – second and third charts.

Timely policy loosening in late 2011 warranted optimism that the authorities would successfully manage a necessary economic slowdown but their failure to deliver further stimulus so far in 2012 – probably reflecting brighter global news and lingering inflation concern – has been a mistake. The latest data, hopefully, will act as a wake-up call and catalyse another policy shift.

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